Macroeconomic Review Q1 2020: Steering a Fragile Economy in the Face of Uncertainties

The Coronavirus which originated in China has spread to over 191
countries and territories.

Many economies have witnessed
reduced economic activities in the first quarter of the year:

Industrial facilities were shut
in China and in other affected countries.

Restriction of movement of
goods and people.

Global supply chain disruption.

Demand for crude oil has
declined and led to sharp drop in oil prices to below $30 per barrel

These factors will have
negative implication on

global growth.

IMF estimates that global
growth will fall below 2.9% recorded in 2019.

Impact on the Nigeria Economy

The combined effect of the oil price crash and the coronavirus pandemic
has hit the already fragile Nigerian economy hard. Prior to the global pandemic
Nigeria economy exhibited two trends : (i )a weak external position with
declining external reserves from $45 billion to $ 38 billion in January 2020;
worsening trade deficit and declining foreign investment inflows and (ii) and
improving internal economic indicators with as shown by improved GDP growth,
stable exchange rate and higher lending to the private sector. The coronavirus
pandemic has changed this and the economy is now more likely to head into a
recession.

Economic growth in Q1 2020 is expected to
fall by 0.6% to less than 2%. FSDH revised estimates show an average growth of
1.4% for 2020. The lower GDP growth will stem from:

Fall in government spending

Depreciating Naira

High Inflation

Sectoral impacts due to shut downs, movement restrictions etc.

Inflation: One major factor
that will drive up inflation rate in March is panic buying as a result of
uncertainties on the Coronavirus situation. Inflation rate rose for the sixth
consecutive month to 12.2% in February 2020. This is the highest rate recorded
since April 2018.

Exchange rate: Following the outbreak of
the COVID-19, forex inflow in the I&E Window fell drastically in the month
of February and the CBN had to intervene. With pressure on the Reserves, the
CBN in March 'adjusted' the exchange rate to NGN360/US$ from NGN306/US$. The
CBN also harmonized the forex market windows as the new rates range from
NGN360/US$ to NGN380/US$. In bid to ensure stability in the forex market, the
CBN in it last MPC meeting unanimously voted to retain all parameters.

Foreign investments: Foreign investments have
also shown a declining trend. Major factors responsible for the decline in
foreign investment inflows include uncertainty on the economy, inconsistent
policies, declining external reserves, insecurity and harsh operating
environment for FDI. As stated in our Outlook released in January, these
factors will continue to limit the inflow of foreign investment in 2020.
Investment inflows in 2020 is expected to be lower than US$24billion
recorded in 2019.

Budget revenue targets will be largely unmet, debts will continue to
rise

Despite the early passage of the 2020 budget, fall in crude oil price
arising from the Coronavirus outbreak has resulted in a fall in crude oil
revenues in the first quarter of 2020.

As at March 20, crude oil traded at US$27 per barrel, US$30 below the
US$57 pb 2020 budget benchmark. Out of the 58 days in the year so far, crude
oil has traded below the benchmark price for 29 days (50%).

With oil price expected to remain low going into Q2 coupled with
staggering oil production volumes due to lower demand and supply glut, funding
the budget will remain a key challenge.

Possible shut down of economic activities across states in the country
and limited movement of persons will also limit the inflow of non-oil revenue
in the year.

We expect the government to review the budget estimates and resort to
further borrowing to cover existing shortfall.

Public debts, which stood at N26.2 trillion as at September 2019 is
expected to increase to about N29 trillion in 2020.

Market performance remains mixed and will continue to
be volatile

There is active speculation and
bargain hunting in the equity market . For fixed income , Investors ask
for higher OMO rates.

The outbreak of COVID-19 has
severely altered the outlook of the Nigerian equity market, reversing the
gains recorded in thewake of the year. It's impact has sent
the NSE ASI to a record low level. As at March 20, ASI dipped by -17.3% to
22,198.43 from 31,430.50 at the first trading day of 2020.

The Nigerian equity market
continued to shed foreign and local participation as total transactions
dropped by 37% to settle at NGN148.5 billion in February 2020.

Domestic investors displayed
apathy as foreign participation expanded to 49.04% up from 29.86% in
January while domestic participation stood at 51.96% down from 70.14% in
January.

Despite the decline in
participation in the market generally, investment inflow was recently
largely dominated by domestic investors. On the other hand, outflow was
dominated by foreign investors given the weak global confidence across
equities markets due to the Coronavirus pandemic. If the spread of the
coronvairus is not curtailed as soon as possible, market confidence will
continue to drown and the market will experience further decline.

The fixed income space was
affected by Coronavirus outbreak as investment sentiment and confidence
are being hampered. As such, the bears dominated the fixed income segment.
There was an uptick in yields from the bond market- average yield pointed
at 11.83% as at March 20 from 11.14% recorded at the beginning of the
year. Average yields are likely to average just below 10%.

In the OMO market space
,average OMO rate has spiked to 16.49% from 13.18% at the
beginning of the year. Recently, the CBN auctioned OMO for subscription,
however, the subscription rate was abysmally low and asking rate ranged
from as high as 16% to 17% across maturities. Persistence and inability of
the global economy to tame the menace of the coronavirus will continue to
affect investor confidence in the market and on the economy.

Coronavirus stimulus package by Nigeria and other
countries

In Nigeria the central bank has taken the lead with a N3.5 trillion
stimulus: Fiscal measures are weak

Extension of moratorium by an
additional one year on CBN intervention funds.

Interest rate reduction from 9%
to 5% on CBN intervention facilities.

Creation of a N50 billion fund
for households, MSMEs industries such as aviation, health, hotels, etc.

Restructuring of loan tenors
for businesses in affected industries particularly oil and gas,
agriculture and manufacturing.

N1trillion in loans to boost
local manufacturing and production across critical sectors while N500
billion will be used to support Health services and products

There could be further increase
of LDR policy from 65% to stimulate lending to the real sector.

Naira 'adjusted' to N380/US$.

Activation of the N1.5 trillion
infraco project for building critical infrastructure.

Fiscal measures

Reduction in pump price of
petrol from N145 per liter to N125 per liter.

Decline in oil price led to a
significant reduction in landing costs which fell below the government
regulated price of N145 per liter.

This in effect cancels out the
petrol subsidies

Increase in price of crude and
higher landing costs could result in higher subsidy payments or an
increase in pump price.

Key Fiscal measures that Federal Government should consider include the
following :

Target specific non-oil
products and industries for exporters to take advantage of the devalued
exchange rate.

Provide intervention funds and
support for essential industries/commodities such as rice, vegetables and
related products to enhance outputs and efficiency.

The
South African Reserve Bank (SARB) commenced buying an unspecified amount of
government bonds in the secondary market as part of additional emergency
policy measures aimed at easing severe liquidity crunch triggered by the
Corona Virus.

Over
R500 million (US$28.59 million) made available to SMEs in distress.

Set
up Solidarity Fund to combat the spread of coronavirus, track the spread and
support affected. Government provided seed funding of R250 million (US$14.3
million).

Expectation from CBN MPC in 2020: March MPC holds
parameters constant

On March 23 and 24, the CBN Monetary Policy Committee (MPC) held its
second meeting of 2020. At the meeting, the Committee took the following decision:

Retain the Monetary Policy Rate (MPR) at 13.5 per cent;

Retain the asymmetric corridor of +200/-500 basis points around the
MPR;

Retain the CRR at 27.5 per cent; and

Retain the Liquidity Ratio at 30 per cent.

This was based on the following considerations:

Prevailing adverse global economy occasioned by the outbreak of
Coronavirus as well as slow

growth outlook for the domestic economy.

Rising inflation rate which stood at 12.2% in February 2020

Rising liquidity due to OMO policy changes

Persistent decline in foreign exchange reserves

Fall in crude oil price

Increasing credit to the private sector

Careful assessment of the recent CBN's policies and stimulus package
aimed at supporting the real

The CBN is
expected to continue in its effort to curtail inflation and ensure exchange
rate stability.

Further, the CBN will intensify its heterodox policies outside the
MPC; continuing to adopt tools such as LDR, OMO, FX restrictions and
interventions to stimulate lending to the real sector and propel economic
growth.

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